The latest Chinese credit creation data released on Tuesday, added significantly to the risk of a "sudden global economic stop" after the PBOC reported that in May, China's broadest monetary aggregate, the Total Social Financing, just posted it smallest monthly increase since July 2016, confirming that Beijing's shadow deleveraging campaign is accelerating and gaining even more traction, even if the threat of a global deflationary spillover is rising by the day.

A quick look at the numbers reveals that there was not much of a surprise in traditional new RMB loans, which rose RMB1150bn in May, slightly below consensus RMB1200bn, growing 12.6% yoy in May.

However, it was the sharp, unexpected plunge in Total social financing growth, which attracted attention and which rose only RMB 760.8bn in May, almost half the consensus print of RMB1300bn, and sharply below April's RMB1560bn increase.

Of the main TSF components, the drop in shadow bank lending was particularly sharp: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in May.

As Bloomberg's Fielding Chan noted, in contrast to the sudden collapse in shadow banking liabilities, bank loans were relatively stable, even though the expansion in outstanding credit slowed further, implying a slightly heavier drag on growth.

Indeed, the lass granular M2 reading also posted a growth slowdown, rising only 8.3% in May, unchanged from April, and below the 8.5% consensus estimate.

Commenting on the ongoing slowdown to China's credit creation, Goldman said that May money and credit data are the result of a tug of war between two forces:

On the one hand, the PBOC adopted a looser monetary policy stance, which provided more ample liquidity to financial institutions.

On the other hand, the financial regulators kept tight controls, which depressed non-RMB loan credit supply, while the recent surge in corporate defaults probably made financial institutions more cautious as well. ril.

Still, while previously Chinese credit had an marked, if delayed, impact on the economy, the relationship between monetary variables and real activity variables has become unstable over the past 2 years, as Morgan Stanley noted recently. This has been affected by a number of factors such as: stronger exports and consumption, both of which are less debt dependent than investment; rapid financial innovation in terms of payment and deposit systems; and the changing structure of credit, which has different impacts on the "real economy".

Given all these changes, Goldman notes that it's hard to know the right level that is consistent with the desired level of activity growth. The government has adopted a "tweak as you go" policy. The level of broad credit growth is likely to be viewed as being at the low end of the suitable range, and authorities may take some measures to prevent it from falling to a lower level, especially given the ongoing trade dispute is already posing downside risks to growth. Such measures could include further RRR cuts.

Alternatively, how much longer can China, and the world, keep ignoring the all-important slowdown in Chinese credit? To be sure, the economy has been surprising resilient this year, buoyed in part by solid global demand. Bloomberg's view is that growth will slow in 2H, as headwinds from credit, slowing exports, and a cooling property sector become stronger.

Meanwhile, the push to curb credit growth even as risks from trade tensions with the U.S. rise suggests strong determination to deleverage the economy.

Finally, the risk is that China hikes too far as it keeps in line with the Fed's own rate hikes: we expect that PBOC will increase its interest rate by 5bps later today, as well as tighten its reverse repo and MLF facility, after the Fed hikes by 25bps. How much higher can China afford to rise rates, and slow its economy, as it tries to prevent capital flight toward the US. We will find out as soon as the market realizes that between central banks and China, there is virtually no new liquidity creation.